1. Steps to Transfer a Sole Proprietorship to an LLC
2. Deciding When to Create an LLC
3. Steps to Transfer a Sole Proprietorship to an LLC
4. Deciding When to Create an LLC

To transfer sole proprietorship to LLC, you create a formal business entity that protects your personal assets from debts and financial obligations associated with your company. It also provides a flexible tax structure. While the specifics of forming a limited liability company (LLC) vary by state, the general guidelines are the same. 

Steps to Transfer a Sole Proprietorship to an LLC

  • Search the name database of the secretary of the state where you plan to form your business to make sure that the name you want for your LLC isn't already in use. 
  • File formation paperwork with the state; this is usually called articles of organization. It will ask for your business name and address, the purpose of your business, the name and address of the state resident or business authorized to receive legal paperwork on behalf of your business (registered agent), and whether your LLC will be managed by the owners (members) or managers hired by the members. 
  • If your LLC has more than one member, you should create an operating agreement. This legally binding document spells out each member's ownership percentage and voting rights, guidelines for distributing profits and losses, and the procedure to follow when a member decides to leave the LLC.
  • Apply for an employer identification number (EIN) with the IRS. This number can be obtained for free and is needed to file taxes, open business bank and credit accounts, and manage payroll. If you already have an EIN for your sole proprietorship, you may be able to transfer it to your LLC by making a request with the IRS.
  • If your sole proprietorship already had a business bank account, you'll need to open a new one for your LLC using the new EIN. This step is important as it separates your personal assets from business assets, a must to provide limited liability protection. It also streamlines your financial records and tax planning and reporting. 
  • Obtain necessary licenses and permits, which vary by industry. Examples include a professional license or health department permit. Your local business office should be able to provide a list of the registrations you'll need to operate.
  • Talk to your CPA or tax advisor to determine the most advantageous tax structure for your LLC, since you have more options than with a sole proprietorship. A single-member LLC is treated as a sole proprietorship by the IRS by default but can opt for corporate taxation.
  • Once your LLC is registered, you can update your business website with a new domain name and host if necessary, order new business cards, and make other changes as needed to reflect the name of your new LLC. 

Deciding When to Create an LLC

It can be challenging for small business owners to decide when to form a legal business entity and determine the type of entity to form. Because incorporating carries effort and cost, many entrepreneurs avoid doing so until the business is successful.

Creating an LLC protects your personal assets in the event that your business is sued. While you may think this can't happen to you, it's important to shield against any potential liability. For example, a catering company could be blamed for a case of food poisoning or an app developer could accidentally spread a computer virus. 

S corporations are designed to be advantageous for small businesses. This type of entity doesn't usually need to pay corporate taxes. With a sole proprietorship, the business is not a separate entity from its owner. An S corporation can also benefit from this structure, known as pass-through taxation. This creates less paperwork and easier tax planning.

On the other hand, businesses that want to issue stock or that are growing quickly may want to set up a C corporation. While this structure is subject to corporate taxes, it can set up a board of directors and sell stock.

An LLC provides personal liability protection but also offers the pass-through tax structure of a sole proprietorship. This means that profits and losses are reported on the owner's personal tax return and thus not subject to corporate tax. However, if a member leaves the organization or dies, the LLC is dissolved in many states.

If you need help with deciding whether to create an LLC from your sole proprietorship, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. 

To transfer sole proprietorship to LLC, you create a formal business entity that protects your personal assets from debts and financial obligations associated with your company. It also provides a flexible tax structure. While the specifics of forming a limited liability company (LLC) vary by state, the general guidelines are the same. 

Steps to Transfer a Sole Proprietorship to an LLC

  • Search the name database of the secretary of the state where you plan to form your business to make sure that the name you want for your LLC isn't already in use. 
  • File formation paperwork with the state; this is usually called articles of organization. It will ask for your business name and address, the purpose of your business, the name and address of the state resident or business authorized to receive legal paperwork on behalf of your business (registered agent), and whether your LLC will be managed by the owners (members) or managers hired by the members. 
  • If your LLC has more than one member, you should create an operating agreement. This legally binding document spells out each member's ownership percentage and voting rights, guidelines for distributing profits and losses, and the procedure to follow when a member decides to leave the LLC.
  • Apply for an employer identification number (EIN) with the IRS. This number can be obtained for free and is needed to file taxes, open business bank and credit accounts, and manage payroll. If you already have an EIN for your sole proprietorship, you may be able to transfer it to your LLC by making a request with the IRS.
  • If your sole proprietorship already had a business bank account, you'll need to open a new one for your LLC using the new EIN. This step is important as it separates your personal assets from business assets, a must to provide limited liability protection. It also streamlines your financial records and tax planning and reporting. 
  • Obtain necessary licenses and permits, which vary by industry. Examples include a professional license or health department permit. Your local business office should be able to provide a list of the registrations you'll need to operate.
  • Talk to your CPA or tax advisor to determine the most advantageous tax structure for your LLC, since you have more options than with a sole proprietorship. A single-member LLC is treated as a sole proprietorship by the IRS by default but can opt for corporate taxation.
  • Once your LLC is registered, you can update your business website with a new domain name and host if necessary, order new business cards, and make other changes as needed to reflect the name of your new LLC. 

Deciding When to Create an LLC

It can be challenging for small business owners to decide when to form a legal business entity and determine the type of entity to form. Because incorporating carries effort and cost, many entrepreneurs avoid doing so until the business is successful.

Creating an LLC protects your personal assets in the event that your business is sued. While you may think this can't happen to you, it's important to shield against any potential liability. For example, a catering company could be blamed for a case of food poisoning or an app developer could accidentally spread a computer virus. 

S corporations are designed to be advantageous for small businesses. This type of entity doesn't usually need to pay corporate taxes. With a sole proprietorship, the business is not a separate entity from its owner. An S corporation can also benefit from this structure, known as pass-through taxation. This creates less paperwork and easier tax planning.

On the other hand, businesses that want to issue stock or that are growing quickly may want to set up a C corporation. While this structure is subject to corporate taxes, it can set up a board of directors and sell stock.

An LLC provides personal liability protection but also offers the pass-through tax structure of a sole proprietorship. This means that profits and losses are reported on the owner's personal tax return and thus not subject to corporate tax. However, if a member leaves the organization or dies, the LLC is dissolved in many states.

If you need help with deciding whether to create an LLC from your sole proprietorship, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.